As the tax year end approaches, Neil Bage explains why investors put off making decisions about money which could lead them to a disadvantaged situation.
According to recent research, two-thirds of adults, or 33 million people, have neglected to save or invest any money into an Isa, therefore missing out on the opportunity to capitalise on their annual tax free allowance.
We know there are a multitude of reasons why this group of 33 million have not, will not, cannot, even should not, put their money into an Isa. However, there is one particular reason that I would like to explore in this article - a reason often overlooked in the search for a reason, and that is investor confidence.
Making a financial decision - in this instance to invest into an Isa - requires a great deal of confidence. We know from our annual UK-wide research that over 30% of the UK adult population suffer from under-confidence, meaning these people are more likely to put off making important financial decisions. Under-confidence makes people ‘feel’ as if they do not have the requisite knowledge to make an informed financial decision, so they make the decision that not making a decision is the best decision!
To compound this, there are other behavioural “sides effects” that come from being under-confident. Amongst these is low self-efficacy, or the conviction that you lack the ability to succeed at a task. However, there is a great deal of research that shows under-confidence can also lead to another common human behavioural trait, procrastination.
Mark Twain famously said "Never put off until tomorrow what you can do the day after tomorrow.”, and this is true of many UK investors who suffer from under-confidence - except in many cases, tomorrow never really arrives.
Procrastination and under-confidence, when working together, can result in people taking choices that can have a negative impact on their financial wellbeing, and in the long term, they do not gain any benefit from this behaviour. Nowhere is this more evident that in HMRC’s self assessment filing process. In 2015, as many as 890,000 people suffering from either under-confidence, self-efficacy, procrastination, or more than likely all three, failed to get their tax return in on time, and HMRC earned themselves almost £9m in fines in the process.
Advisers can play an important role in helping those who suffer from under-confidence, recognise their existing knowledge and understanding, and then help them to build on this knowledge going forwards. Doing this ensures that important decisions can be made, and people’s financial well-being can be secured - and that sounds like a pretty good outcome to me.